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Golden Circle's fresh start

The appointment of a new MD will begin the fruit canner’s resurrection.

Golden Circle, the struggling fruit canner and juice maker that’s been at the centre of a complicated and tortuous takeover battle, will appoint a new managing director today or tomorrow after control passed to Phil Cave’s Anchorage Capital last week.

In many ways this deal is Wesfarmers/Coles writ small.

Shareholders last week approved a recapitalisation plan that gave Anchorage 35 per cent of the company, rebuffing higher-priced bids from Coca-Cola Amatil and Peter Brooks’ P&N Industries and thwarting the efforts of corporate raider and 6 per cent shareholder Peter Yunghanns to stop the deal going ahead.

It has been an interesting and instructive transaction: Cave and his investors got control for 80c a share – at least 20c less than the full cash alternatives – because they offered the hope of redemption and victory to the growers who own Golden Circle. And farmers are nothing if not optimists.

Coke and P&N can’t really believe it. They plan to keep talking to the board to try to get a full sale, but they can probably save their breath – it will be at least 18 months before Phil Cave and chairman Ern Pope, who has been manfully running the business as executive chairman for the past nine months, look for buyers, or perhaps a public float.

Today’s appointment of a chief executive will be the start of the turnaround of this iconic Australian food brand.

But perhaps the most interesting aspect of this story is the Babcock & Brown convertible note that was the seat of Golden Circle’s problems.

Two years ago, the company needed cash for expansion. Instead of raising new equity, because they did not want to be diluted, the grower/shareholders instead turned to Babcock & Brown.

"Come in, come in,” said the smiling chaps from B&B and offered to provide $50 million in return for three-year convertible notes and 21 per cent per annum interest. That’s right 21 per cent.

The Golden Circle farmers then proceeded to reinforce all the stereotypes about country bumpkins by accepting that deal from the city suits. They could have borrowed money at half that rate almost anywhere else.

The interest helped cripple the company and the looming conversion of the notes to a controlling equity stake next year backed an increasingly frantic board of directors into a corner.

Step up another city suit named Phil Cave. He did a smart thing before talking to the board about his idea of a recapitalisation and a controlling equity stake: he bought an option over B&B’s convertible notes. That meant he effectively had his foot on the business.

Meanwhile, Golden Circle has a 10-hectare block of vacant land next to its factory near Brisbane airport, called the "army land” (it used to be owned by the army). That has been put on the market for $35 million and Ern Pope and the board are now working through several bids.

Cave arranged bridging finance of $35 million against that land sales and last week paid $35 million for 35 per cent of the company. That money went straight to B&B to pay off the loan.

In addition, GE Capital has provided a new debt facility of $120 million, most of which has been drawn down to repay other debt. The interest rate? Two per cent over bank bills, or about 9 per cent.

The interest saving is $7 million per annum, which is more than the entire net profit of the company last year.

The growers ended up being diluted, but at least Phil Cave is working with them to turn the business around rather than just taking it off them.

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